Despite Split, Don’t Dive Into Demand Media

by Tom Taulli | February 20, 2013 12:19 pm

[1]Demand Media (NYSE:DMD[2]) sure is seeing lots of demand from investors today. So far, shares are up nearly 7%, although its current price just over $8 is still well below the 52-week high of $12.50.

In the fourth quarter, DMD reported revenue of $103.1 million, up from $84.4 million in the same period a year ago. Excluding the cost of acquiring traffic, revenue was $96.8 million — in line with expectations. Adjusted earnings came to 12 cents a share, beating estimates by a penny.

While it was a strong report, investors appear to be more excited about DMD’s plan to split its business. The company has a domain name service as well as an extensive set of online content properties and, for the most part, the synergies have been fairly loose.

With that in mind, the move makes a lot of sense, as it will allow each company to focus better. The domain-name business, for one, is the world’s largest, with close to 8,800 resellers. During the past three years, the system has grown the number of names by 66% to 15 million. In fact, the business actually may be attractive to another player like Go Daddy or even Google (NASDAQ:GOOG[3]).

And the media business is solid too, with about 125 million monthly visitors. Plus, there are growth opportunities in foreign markets and mobile content.

This is good news, but shareholders should still be a bit wary. DMD’s announcement has essentially unlocked the discount that the Street was placing on combination of the two assets. In other words, going forward, it will take a while to pull off the deal — probably 9 to 12 months. It won’t be cheap and could be a distraction.

Tom Taulli runs the InvestorPlace blog IPO Playbook[4]. He is also the author of “How to Create the Next Facebook[5]” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders[6].” Follow him on Twitter at@ttaulli[7]. As of this writing, he did not hold a position in any of the aforementioned securities.

How to Create the Next Facebook: http://www.amazon.com/gp/product/1430246472/ref=s9_simh_gw_p14_d0_i1?pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center-3&pf_rd_r=0GRB6ZMCTYDZVNG7Q7NV&pf_rd_t=101&pf_rd_p=470938811&pf_rd_i=507846